FX Volatility Builds the Business Case for Treasury Software

By Kyriba Value Engineering
Ron Stott

In my experience as a treasury practitioner and consultant, I have repeatedly observed the difficulty of getting budget approval for purchasing a treasury management system (TMS). Treasury typically needs to demonstrate to the CFO how adopting a TMS will benefit the entire organization, but competing with other project requests can be quite the shark tank. However, addressing FX volatility may provide an opening for treasury.

In this blog, which is part of our Value Engineering series, we will address how FX volatility may be the key to getting treasury project approval.

Prioritizing FX Risk Management

Often, the treasury team identifies how a TMS will eliminate key pain points and calculates a healthy ROI. Yet treasury cannot obtain approval for the project. Often, your ability to function with imperfect data and brute force may work against you; the issues you are striving to address with a TMS is not readily visible to management.

In addition, rarely is treasury the only department looking for project approval. You are typically competing for capital against other departments with other issues. You therefore need to not only show a solid ROI, but also the beneficial impact to the company to prove why your project should be prioritized over others.

FX volatility is not just a treasury issue, it is a corporate issue. In building your business case, have you identified and addressed the issues with your current currency FX risk management process? What has been your FX forecast exposure? What has been the impact of currency volatility on net earnings? If you have material exposure to foreign currency volatility, was transforming FX risk management your first or second reason you articulated your need for a TMS? I suggest that it should be the reason you lead with in your business case to senior management. I will now discuss why this should be your strategy in getting your TMS project approved.

FX Volatility Surging

According to Kyriba’s January 2023 Currency Impact Report, North American corporates sustained a staggering $43.15 billion in negative impacts to earnings from currency volatility. The combined pool of North American and European corporations reported $17.04 billion in tailwinds and $47.18 billion in headwinds in the third quarter of 2022. Reducing those headwinds requires accurately identifying your exposures and executing the most cost-effective strategies to mitigate FX risk.

If your company has significant FX exposure it should be a part of your due diligence in selecting a TMS partner. A point solution in FX management will lack integration with your cash forecast and automation in cash accounting, hedge accounting and payment workflows, delivering less productivity and cost benefits as a TMS with an integrated FX risk management function.

When it comes to FX risk management, most companies struggle to get an accurate handle on their FX exposure. If you need to gather information from disparate systems and operations around the globe, it can result in incomplete, obsolete or erroneous data. As a result, FX hedging based on imperfect data yields imperfect, unexpected results. FX volatility and its impact on corporate earnings affects share price, shareholder return, borrowing cost and capital spending. Unexpected currency impacts on earnings can create the perception that the company is poorly managed.

Clearly this is a larger issue to the CFO and senior management, which is why you should make it the leading reason you are seeking a TMS.

The Value of Complete FX Exposure Data

Kyriba’s Enterprise Liquidity Management platform can automatically gather detailed exposure data from disparate systems. Many companies identify their exposures with 75% or less accuracy. Kyriba can improve this to 90% or more, resulting in a significant reduction in volatility. This can be tens of millions of dollars, depending on the size of your exposures and accuracy improvement.

Public Multinational - Potential Annual Kyriba ELP Benefits graphic

To the right is a summary chart of the benefits that a public multinational company would receive after implementing Kyriba’s Enterprise Liquidity Platform, excluding and including the FX earnings-at-risk reduction. If you were the CFO of this company, which proposal would you be most excited about?

In addition, obtaining detailed exposure data down to the invoice level can identify additional natural hedge opportunities and internal offsetting exposures. The result is a reduction in the exposure. Less exposure in turn means less cost, especially as the increase in volatility in the markets has resulted in a sharp increase in FX currency derivatives.

Having the ability to model the company’s exposure with sophisticated tools such as Value at risk (VaR), you can determine the most cost-effective hedging strategy.

As with your other treasury processes, automation can yield substantial productivity savings in your FX risk management process. By reducing or eliminating manual and repetitive tasks that are necessary to gather information, your TMS should be able to generate a significant productivity gain.

Those savings come not just in the treasury department but from finance operations and other areas where data is provided manually. Automation should be end-to-end, from exposure identification, hedge approval, contract execution, contract confirmation, mark-to-market, settlement, and reporting. If your company seeks hedge accounting treatment, your accounting team likely spends a significant amount of time and effort in documenting and complying with the requirements of hedge accounting. If you have outsourced the hedge accounting process, you may be able to eliminate a significant vendor cost.

Benefits to the Entire Organization

If your company has significant exposure to currency volatility, your CFO should see the value in a TMS that digitizes and addresses problems in your FX risk management program. Those benefits, along with productivity gains in other functional areas, cost savings and improved liquidity management, elevate the project from one that helps treasury work better to one with sizable benefits across the entire organization.

When building the business case for TMS adoption, you should absolutely identify and present the other benefits. But leading with improved FX risk management can display and elevate the wide-ranging impact of the project.